In the new issue of Regulation, economist Pierre Lemieux argues that the recent oil price decline is at least partly the result of increased supply from the extraction of shale oil. The increased supply allows the economy to produce more goods, which benefits some people, if not all of them. Thus, contrary to some commentary in the press, cheaper oil prices cannot harm the economy as a whole.

Two long wars, chronic deficits, the financial crisis, the costly drug war, the growth of executive power under Presidents Bush and Obama, and the revelations about NSA abuses, have given rise to a growing libertarian movement in our country – with a greater focus on individual liberty and less government power. David Boaz’s newly released The Libertarian Mind is a comprehensive guide to the history, philosophy, and growth of the libertarian movement, with incisive analyses of today’s most pressing issues and policies.

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Commentary

Oil Is No Reason to Stay in the Persian Gulf

By
Jerry Taylor

August 27, 1998

It’s pretty hard to ignore the fact that almost all the Islamic peoples of the Middle East fervently pray for the day that we pack up our guns, airstrips and military bases and go home. Whether we like it or not, aside from the Israelis (who are more than happy to have us fight their battles for them) the only people who welcome our presence in the Persian Gulf are a handful of corrupt dictators and monarchs that live in fear of other corrupt dictators and monarchs. And even they have mixed feelings about the pushy houseguest that is turning the whole neighborhood into a lynch mob. No amount of popular hatred, suicidal truck bombing, catastrophic terrorism, bio-chemical armaments or renewed threats of war seems capable of making us want to leave.

Why? Ex-president George Bush justified U.S. troops in the Middle East by evoking the ghost of the 1970s — the oil crisis. Do we really want crazy fundamentalists and pathological dictators, he asked, to have life-and-death control over the economy of not just this nation, but the world? The socio-economic trauma of the oil crisis still haunts the American psyche, so much so that politicians couldn’t care less if our foreign policy is beginning to resemble the imperialist caricature of capitalism peddled by V. I. Lenin.

The oil rationale for our presence in the Middle East, however, is absolutely ridiculous. Consider; Sadaam Hussein is desperate to sell Iraqi oil on the international market. He wants oil revenues to build his military, build more palaces and fund terrorist activities … to get us out of the Persian Gulf. Oil is only valuable to Middle Eastern regimes because it earns them currency that is completely unavailable to their economies otherwise.

The socio-economic trauma of the oil crisis still haunts the American psyche, so much so that politicians couldn’t care less if our foreign policy is beginning to resemble the imperialist caricature of capitalism peddled by V. I. Lenin.

But once oil is in the global marketplace, there is no way to keep it from the United States, even in the teeth of a direct boycott. As MIT’s Thomas Lee, Ben Ball, Jr. and Richard Tabors have written, “it was no more possible for OPEC to keep its oil out of U.S. supply lines [in 1973] than it was for the United States to keep its embargoed grain out of Soviet silos several years later. The embargo was circumvented by simply rerouting through the international system. The significance of the embargo lay in its symbolism.”

Moreover, the world’s economy is far less dependent on Middle Eastern oil today than it was in the 1970s. In 1973, 37 percent of the world’s oil came from Persian Gulf nations; today, only 28 percent does. Fully 82 percent of America’s imported oil comes from nations outside of the Persian Gulf. We would have plenty of other sources to turn to in case of any Persian Gulf boycott or temporary regional supply disruption, particularly given the increasing amount of unutilized oil production capacity in non-OPEC countries.

The world, furthermore, is swimming in an historic glut of oil. Due to exponential advances in production technology and energy efficiency, the price of gasoline today — after adjusting for inflation — is less than it was in the late 1960s. It takes far less oil to produce a dollar’s worth of goods and services in today’s economy than ever before. Simply put, oil in the ground is a depreciating asset.

Contrary to popular opinion, oil prices are simply not that important to the overall economy. Only 2 percent of our gross domestic product (GDP) is spent on petroleum. Economist Douglas Bohi calculates that the petroleum shortages of the 1970s reduced the nation’s GDP by only 0.35 percent. Many economists now agree that wage and price controls, inflationary monetary policy and economic mismanagement large and small by the Nixon, Ford and Carter administrations were the root cause of the economic downturns of the 1970s. Both political parties, however, found it useful to blame OPEC for the economic mistakes of their party leaders.

How many innocent civilians should we be prepared to sacrifice in order to keep gasoline prices from rising a dime a gallon? Fortunately, the answer is “none.” Oil will be there for us at affordable prices no matter how anti-American the master of the oil fields may be. There might be reasons to risk catastrophic and routine terrorist attacks in the United States (reasons, I might add, that are increasingly dubious by the day), but oil sure as heck is not one of them.